The Global Intangible Low Taxed Income (GILTI) tax regime was first introduced under the 2017 Tax Cuts and Jobs Act. The purpose of this provision was to reduce the incentives for U.S. based corporations to decrease their overall tax liability by shifting profits to subsidiaries in low or no-tax jurisdictions. New Jersey initially introduced guidance that required corporate (CBT) taxpayers to include the calculated GILTI income in its tax base, regardless of whether the income was distributed or not from the foreign subsidiary. As a result, NJ S corporation shareholders paid NJ personal tax on this “phantom” income from the foreign subsidiary even if no cash dividend was paid to the shareholder.
However, following a recent revision to the federal GILTI regulations, the NJ Division of Taxation has provided an update indicating that a NJ S corporation does not have to include GILTI income in its NJ taxable income as “phantom” income but rather will include such income only when the foreign subsidiary makes a dividend payment to the NJ S corporation parent. This change in regulations will have a significant impact on those who have had to include their share of GILTI income on their NJ 1040. Impacted taxpayers may be entitled to obtain a refund of taxes previously paid.
Please consult your WilkinGuttenplan tax advisor with any questions.